Retail sales, inventory data suggest strong fourth-quarter growth

People shop inside a Target store during Black Friday sales in the Brooklyn borough of New York, November 29, 2013.Eric Thayer

WASHINGTON (Reuters) - U.S. retail sales edged up in December with a core spending gauge posting a big jump, a sign the economy gathered steam at the end of last year and was poised for stronger growth in 2014.

The Commerce Department said on Tuesday that retail sales gained 0.2 percent last month, even as receipts at automobile dealers recorded their biggest drop in more than a year.

"The surge in sales in December means the momentum will continue into the first quarter of the new year. 2014 is shaping up to be pretty good from where we sit," said Chris Rupkey, chief economist at Bank of Tokyo-Mitsubishi UFJ in New York.

Economists had expected retail sales to rise just 0.1 percent last month. For all of 2013, sales increased 4.2 percent.

Sales excluding automobiles, gasoline, building materials and food services, increased 0.7 percent after a 0.2 percent rise in November. Economists looked for a gain of just 0.3 percent.

These so-called core sales correspond most closely with the consumer spending component of gross domestic product, and the increase suggested consumption accelerated in the fourth quarter from the third quarter's 2 percent annual pace.

While a report on Friday showed job growth stumbled in December, that was largely dismissed as being due to cold weather, and economists said a wealth of other data suggest the economy is gaining strength.

"Weather aside, if we're right in thinking that the underlying trend in jobs growth is still improving, households will continue to spend more freely in 2014," said Paul Dales, senior U.S. economist at Capital Economics in London.

"This report supports our view that a 4 percent annualized rise in real consumption will help to generate a decent 3.0 percent gain in overall GDP in the fourth quarter," he added.

The government report suggested holiday sales were better than some had expected, though at the cost of heavy discounting by shopkeepers. The National Retail Federation said a measure of holiday sales, which leaves out spending on cars, gasoline and restaurant meals, rose 3.8 percent in the November-December period from a year earlier, up from the 3.5 percent rise in 2012.

FOURTH-QUARTER GROWTH LOOKING STRONGER

Fourth-quarter growth prospects were further boosted by a second report from the Commerce Department showing retail inventories, excluding autos, increased 0.6 percent in November after increasing 0.3 percent in October.

Businesses aggressively accumulated inventories in the third quarter and warehouses were left bulging. Economists had anticipated a need for businesses to sell off those goods, which would have undercut production in the fourth quarter.

It now appears some of the inventory build-up was planned.

"It does not appear that the fourth-quarter GDP report will feature a drag from inventories and, possibly, might even show a modest further addition to growth," said John Ryding, chief economist at RDQ Economics in New York. "It is hard to argue that this pickup in inventory investment is excessive."

The economy grew at a 4.1 percent rate in the third quarter, which was the fastest pace in almost two years. Fourth-quarter GDP growth estimates range as high as a 3.9 percent rate.

Stocks on Wall Street were trading higher on the data, while the dollar rose against the yen. U.S. Treasury debt prices fell.

A stock market rally last year and rising home values have boosted household wealth, encouraging Americans to open their wallets a little bit more.

Sales last month were lifted by a 1.8 percent rise in receipts at clothing stores. Sales at food and beverage stores recorded their largest increase in seven years. There were also increases in online store sales.

"Consumer spending continues to get tailwinds from the recovery in the housing market, as well as fortuitous declines in the price of gasoline," said Brian Bethune, chief economist at Alpha Economic Foresights in Boston.

A cold snap likely held down sales of automobiles. Receipts at auto dealers fell 1.8 percent, the largest decline since October 2012. They had risen 1.9 percent in November.

Sales of furniture, sporting goods, building materials and garden equipment and electronic appliances also fell.

A separate report from the Labor Department showed import prices were unexpectedly flat in December, showing no signs of imported inflation.

Domestic inflation continues to trend lower and the lack of price pressures means the Federal Reserve will likely keep interest rates near zero for a while even as it scales back its monthly bond purchases.